CH 6
Which of the following factors do Porter label as basic factors of production?
- climate - natural resources
Advanced ones include communication infrastructure, skilled labor force, and research facilities.
Factor endowments
Basic ones are natural resources, climate, location, and demographics.
Factor endowments
T/F Porter's theory has been subjected to detailed empirical testing and it is proven that it accurately predicts international trade patterns.
False
Which theory does NOT support unrestricted free trade between countries?
Mercantilism Mercantilism makes a case for government involvement in promoting exports and limiting imports
The most current theory was developed by Michael Porter and states that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage.
National competitive advantage theory
T or F: First-mover advantages are especially important in industries where the global market can profitably support only a limited number of firms.
True
T/F Porter's theory suggests that it is in the best interest of business for a firm to invest in upgrading advanced factors of production.
True
Which scenario depicts the Leontief paradox?
U.S. exports were less capital intensive than U.S. imports.
A company _____ benefit from related industries that are internationally competitive and can spill over into the company.
can *Related and supporting industries: the presence of suppliers or related industries that are internationally competitive. EX: technological leadership in the US semiconductor industry provided the basis for US success in personal computers and several other technically advanced electronic products
Ricardo's theory of _____ advantage states that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and then purchase the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.
comparative -while this seems counterintuitive, but ex: "Ghana is comparatively more efficient at producing cocoa that it is at producing rice" - so without trade, each country must consume what it produces
Ricardo's theory of comparative advantage assumes ______ returns to scale.
constant
Porter argues that achieving international success in a certain industry is a function of factor endowments, domestic demand conditions, related and supported industries, and ______.
domestic rivalry
Portugal can produce wine and cloth with less labor than England. But, given all factors of production, England can produce cloth relatively better than Portugal. According to Ricardo's theory of comparative advantage, it make sense for England to
export cloth and import wine from Portugal.
According to Heckscher and Ohlin, each country has certain ______, such as land, labor, and capital.
factor endowments
Preempting demand, gaining volume cost advantages, building the brand, and establishing a long-term competitive advantage are associated with
first-mover advantages
Porter states that ______ can influence each of the four components of the diamond through subsidies, education policies, and policies toward capital markets.
government
According to Vernon's product life-cycle theory, while demand for a product is starting to grow rapidly in the United States, demand for the product in other countries is limited to _____.
high-income groups *demand for most new products tends to be based on nonprice factors- thus, firms can charge relatively high prices for new products, which obviates the need to look for low-cost production sites in other countries
A country is said to have an absolute advantage in the production of an item when the country
is more efficient than any other country at producing the item.
If barriers to free trade in services were eliminated
it would be easier for countries to import services they produce less efficiently.
Wealthy country A enters into a free trade agreement with poor country B. Country B improves its productivity. Country A pays lower prices for goods imported from poor country B. However, Samuelson expresses concern that these lower prices may not offset possible ______ in wealthy country A.
lower real wage rates
Brianna lives in a nation that encourages the production of goods for exporting and to satisfy the needs of the nation's citizens. This results in the nation relying less on importing goods. Which trade theory does this reflect?
mercantilism
When a government intervenes to achieve a surplus in the nation's balance of trade, this action is consistent with the main tenet of ______.
mercantilism
Emerging in the 1970s, this theory states that through its impact on economies of scale, trade can increase the variety of goods available to consumers while decreasing the average cost of those goods
new trade theory
Samuelson is concerned that advances in communications technology will result in the
offshoring of service jobs.
Sachs and Warner found a strong correlation between a(n) ______ response to trade and economic growth.
open *they created a measure of how "open" to international trade an economy was and then looked at the relationship between "openness" and economic growth for a sample of more than 100 countries from 1970 to 1990 and found that countries that adopt a more "open" stance toward international trade, enjoy higher growth rates than those that close their economies to trade.
In the mid-1960s, a theory initially proposed by Raymond Vernon, points out that where a new product is introduced is important. Over time, cost considerations start playing a greater role in the competitive process.
product life-cycle theory
When discussing constant returns to specialization, it is realistic to assume that the units of resources required to produce one unit will _____ no matter where a country is on the production possibilities frontier.
remain the same
A criticism of Ricardo's theory of comparative advantage is that it is a simple model that includes many
unrealistic assumptions
The trade theories associated with Smith and Ricardo advocate for _____ free trade.
unrestricted
A situation in which an economic gain by one country results in an economic loss by another is called a
zero-sum game
What are three sources of economies of scale?
- Spreading fixed costs over a larger volume - The ability of large-volume producers to use more effective, specialized employees - The ability of large-volume producers to use more specialized equipment ** Economies of scale: are unit cost reductions associated with a large scale of output. Economies of scale are a major source of cost reductions in many industries. Ex: automobile companies realize economies of scale by producing a high volume of automobiles from an assembly line where each employee has a specialized task
Which two simultaneous outcomes are implied by new trade theory?
-a nation can increase the variety of goods available to consumers -a nation can lower the cost of the goods being offered to consumers
Choose the four national attributes that Porter theorizes shape the environment that local firms compete in.
-demand conditions : the nature of home-country demand for the industry's product or service -factor endowments: a nation's position in factors of production, such as skilled labor or the infrastructure necessary to compete in a given industry -related and supporting industries: the presence or absence of supplier industries and related industries that are internationally competitive -firm strategy, structure and rivalry : the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry
A basic message of Ricardo's theory of comparative advantage is that:
-potential world production is greater with unrestricted free trade than it is with restricted trade. -even if countries lack an absolute advantage in the production of any good, consumers can still consume more if there are no restrictions on trade.
Porter developed ______ broad attributes of a nation that shape the environment in which local firms compete.
4 *these attributes promote or impede the creation of competitive advantage. He argues that the effect of one attribute is contingent on that state of another
Established in 1776, Adam Smith stated in this theory that countries should specialize in the production of goods and services for which they can produce most efficiently and then trade these for goods produced by other countries.
Absolute Advantage theory
In 1817, David Ricardo stated that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries.
Comparative Advantage theory
Which form of returns to specialization means that the units of resources required to produce one unit are assumed to remain the same no matter where a country is on the production possibilities frontier?
Constant
These can help companies create a competitive advantage, when knowledgeable domestic buyers pressure firms to innovate and create more advanced products.
Demand conditions
Different management ideologies can help or harm building national competitive advantage; strong associate with persistence of competitive advantage.
Firm strategy, structure, and rivalry
In the early 1900s, this theory predicts that countries will export those goods that make intensive use of factors that are locally abundant and import goods that make intensive use of factors that are locally scarce.
Heckscher-Ohlin theory
What assumption does the Ricardian model of comparative advantage make in terms of converting resources?
It assumes that all resources can easily shift from one thing to another.
How does the product-life cycle theory relate to the modern world?
Its relevance in the modern world seems limited as more and more products are introduced outside of the United States.
According to the Heckscher-Ohlin theory, it is expected that the United States would export capital-intensive goods and import labor-intensive goods, but the opposite was found to be true. This became known as the:
Leontief paradox. * To Leontief's surprise, he found that U.S exports were less capital intensive than U.S. imports. Because this result was at variance with the predictions of the theory, it became known as Leontief paradox
______ is the first theory of trade that advocated that a country should export more than it imports and should accumulate gold and silver to make up the difference and maintain a trade surplus.
Mercantilism *maximize exports and minimize imports
Which of these companies is demonstrating a first-mover advantage?
Nelson Concrete recently opened a production plant in the Middle East after learning there were no competitive firms in that area.
Because of economies of scale, some countries specialize in manufacturing a particular product (such as cars) for which the global market can only support a limited number of firms. This is a reflection of _____.
New Trade Theory NTT stresses that in some cases, countries specialize in the production and export of particular products not bc of underlying differences in factor endowments but bc in certain industries the world market can support only a limited number of firms. So firms who enter the market first are able to build a competitive advantage that is subsequently difficult to challenge.
The presence of these ancillary companies, often suppliers, can help achieve strong competitive positions through their strengths within the same industry.
Related and supporting industries
T/F According to the theory of comparative advantage, potential world production is greater with unrestricted free trade than it is with restricted trade.
True
True or false: The benefits from free trade are not evenly distributed throughout an economy.
True Reason: Unions or other parts of the labor force might suffer from free trade while consumers might benefit
The mercantilist doctrine promoted government intervention in order to achieve
a surplus in the balance of trade
When a country is more efficient at producing a product than any other country, the country has a(n) ______ advantage in the production of that product.
absolute According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for those produced by other countries
To gain competitive advantage, it is important to encourage companies to invest in factors of production (Choose between advanced or basic.)
advanced *Factor endowments lie at the center of the Heckscher-Ohlin theory. Porter recognizes hierarchies among factors, distinguishing between *basic factors*: (natural resources, climate, location and demographics) and *advanced factors:* (communication infrastructure, sophisticated and skilled labors, research facilities and technological know-hows. He argues that advanced factors are the most significant for competitive advantage. Unlike the naturally endowed basic factors, advanced factors are a product of investment by individuals, companies and governments. Thus, government investments in basic and higher education, by improving the general skill and knowledge level of the population and by stimulating advanced research at higher education institutions, can upgrade a nations advanced factors.
According to Porter, which factor endowment would be classified as an advanced factor?
communication infrastructure
Economic studies have suggested that according to the theory of ______ advantage, countries will experience higher growth rates if they follow a more open stance toward international growth.
comparative
Heckscher and Ohlin identified differences in national factor endowments as the root of ______.
comparative advantage -Swedish economists Heckscher and Ohlin put forward a different explanation of comparative advantage. - argued that comparative advantage arises from differences in national factor endowments. By factor endowments, they meant the extent to which a country is endowed with such resources as land, labor, and capital. -Nations have varying factor endowments, and different factor endowments explain differences in factor costs; specifically, the more abundant a factor, the lower its cost
Porter states that a company can gain ______ advantage if their home customers are demanding and knowledgeable.
competitive
Which term indicates that the units of resources required to produce a good are assumed to remain fixed no matter where one is on a country's production possibility frontier?
constant returns to specialization
According to new trade theory, the first mover's ability to benefit from increasing returns ______ for other firms.
creates a barrier to entry *bc they are able to gain economies of scale, the first movers in an industry may get a lock on the world market that discourages subsequent entry. - discourages new entry and reinforces the dominance bc global demand may not be sufficient to profitably support another producer *New trade theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology. Trade allows a nation to specialize in the production of certain products, attaining scale economies and lowering the costs of producing those products, while buying products that it does not produce from other nations that specialize in the production of other products. So, the variety of products available to consumers in each nation is increased, while the average costs of those products should fall, as should their price, freeing resources to produce other goods and services
What did Porter call the concept where firms are typically most sensitive to the needs of their closest customers?
demand conditions Porter emphasize the role that home demand plays in upgrading competitive advantage. He argues that a nation's firms gain competitive advantage if their domestic consumers are sophisticated and demanding. For example, he notes that Japan's sophisticated and knowledgeable buyers of cameras helped stimulate the Japanese camera industry to improve product quality and to introduce innovative models.
Which type of returns to specialization happen when additional units of resources are required to produce each additional unit?
diminishing
It takes 12 units of resources to produce 100 pounds of silk. It takes 13 units to produce 115 pounds of silk and 15 units to produce 120 pounds of silk. This is an example of ______ returns to specialization.
diminishing Diminishing returns to specialization occur when more units of resources are required to produce each additional unit.
According to Michael Porter, there is a strong correlation between _____ and the creation and persistence of competitive advantage in an industry.
domestic (within the country) rivalry (competition for the same objective or for superiority in the same field) Domestic rivalry creates pressures to innovate, to improve quality, to reduce costs and to invest in upgrading advanced factors. Vigorous domestic rivalry induces firms to look for ways to improve efficiency, which makes them better international competitors.
Based on new trade theory, as the size of markets increases, companies may be able to attain better ______.
economies of scale
The reductions in the cost of a single unit that result from large scale output of that product are called
economies of scale
Based on the theories of Smith, Ricardo, and Heckscher-Ohlin, in a country with access to cheap labor, productive land, and diverse plant life, it makes sense to _____ agricultural goods.
export -Smith, Ricardo, and Heckscher-Ohlin identify the specific benefits of international trade. Their theories tell us that a country's economy may gain if its citizens buy certain products from other nations that could still be produced at home. why? because gains arise when international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries.
In Porter's model of the determinants of national competitive advantage, he noted many U.S. firms were led by people with ______ backgrounds, likely leading to U.S. firms' lack of attention to improving manufacturing process and product design.
finance He argued that the dominance of finance led to an overemphasis on maximizing short-term financial returns
Jameson Machinery Inc. wants to release their newest equipment in the South American market before other companies in order to establish the Jameson brand. In other words, the company wants to benefit from ____.
first-mover advantages
Manatee Mfg. is able to source parts for its refrigeration products from anywhere in the world because the United States does not place any quotas or limitations on the imports they need. This is a reflection of a _____ policy.
free trade
Ricardo's theory encourages ______ because it suggests that trade is a positive-sum game where all participating countries realize economic gains.
free trade
Simone lives in a country in which the government does not impose quotas on what can be imported or on what businesses can produce and sell to another country. What type of situation does this describe?
free trade
______ is reflected in a nation in which the government does not attempt to influence what its citizens can buy from another country by applying import duties or what citizens can produce and sell to another country.
free trade *free trade refers to a situation in which a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country
New trade theory states that some countries specialize in the production and export of a particular product because _____.
in certain industries the world can only support a limited number of firms *In such industries, firms that enter the market first are able to build a competitive advantage that is subsequently difficult to challenge. Thus, the observed pattern of trade between nations may be due in part to the ability of firms within a given nation to capture firsts-mover advantages
Which trade theory has these implications: (1) nations may benefit from trade even when they do not differ in resource endowments or technology; and (2) specialization allows for scale economies and lower production costs?
new trade
Raymond Vernon noticed that in the 1960s, the wealth and size of the U.S. market was a natural incentive to develop new consumer products. What theory did he propose based on this fact?
product life-cycle
The ethnocentric view that most new products are developed and introduced in the United States is a key weakness in the ______ theory.
product life-cycle
Which theory was based on the observation that early in the development of a commodity, all the parts and labor come from the area in which it was invented?
product life-cycle
Which aspect of Porter's Diamond is best evidenced by the U.S. semiconductor industry providing the basis for U.S. success in the production of personal computers?
related and supporting industries
Reflecting the theories of Smith, Ricardo, and Heckscher-Ohlin, free trade permits ______, which allows a country to manufacture and export in those areas where they have a comparative advantage.
specialization *the gains arise bc international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries.
